Understanding ECN And STP Forex Brokers

In forex trading, No dealing desk or NDD brokers provide traders with direct access to the interbank market. These brokers do not offer re-quotes on client orders. Therefore, NDD brokers are either Straight Through Processing (or STP brokers) or Electronic Communications Network (or ECN brokers). The main difference between them is that STP brokers send client orders directly to liquidity providers, whereas ECN forex brokers also allow interaction between clients’ orders.

STP Forex Broker

These brokers simply pass on the orders of clients to a counter party which can be an ECN broker, a Market Maker or an STP broker. They charge clients on the basis of spread and commissions for executing the trade, eliminating any conflict of interest. STP brokers may have one liquidity provider or several providers. If there are more liquidity providers, then clients can hope to get better spreads and execution of their orders.

They may offer fixed or variable spreads. However, they do not trade against their clients, but add small markups to spread quotes. This is done by adding one pip to the best bid and subtracting one pip from the best ask offered by their liquidity provider.

STP brokers allow their clients to trade at the times of release of economic or financial news without any kind of restriction. Generally, STP brokers are transparent and provide better and faster filling of clients’ orders.

STP Forex Brokers – Advantages

• Orders of clients are processed quickly.
• They offer correct currency prices.
• Orders are automatically executed.
• Clients can avoid quotes on STP platforms.
• They never allow clients to lose their trades.
• Risk involved is lesser compared to some of the other types of brokers.
• They provide clients with live market trends.

ECN Forex Brokers

ECN brokers are essentially STP brokers that, but they allow other clients to be a counter party for a transaction apart from routing clients’ orders directly to the interbank market for execution. In effect, ECN brokers provide a marketplace which enables all of their participants – individual traders, banks and market makers – to trade against each other by making available competitive bids and offers on their platform. ECN brokers show the lowest offer and the highest bid. Some ECN brokers display even the market depth through a data window which displays the order size that accompanies the quoted offer or bid.

ECN forex brokers provide the best possible spread offered by current market participants. The spread shown on their platform is always that of the InterBank market. They do not manipulate spreads. Market makers make money by manipulating spreads. As ECN brokers do not mark up spreads, they don’t mess with the spreads. They make money through commissions and fees.

Spreads are never fixed with ECN brokers. They always vary depending on a currency pair’s market liquidity. At times, the spread may be as low as 0.2 pips or even zero.

ECN Forex Brokers – Advantages

• Clients get access to better spreads as they are derived from different sources. They get to trade on the liquidity provided by world-class banks/high-class financial institutions.
• Higher liquidity; scalping traders will find it more beneficial.
• As orders are passed on to other market participants, ECN forex brokers will never trade against their clients.
• Clients’ trades remain anonymous on an ECN forex trading platform. This is helpful to traders as they can execute transactions that reflect the actual market conditions. They are not guided by any tactics or strategies.
• Execution of orders is carried out and confirmations provided instantaneously. There is no dealing-desk intervention or re-quote of prices.
• Retail traders are provided with tight bid-ask spreads.

ECN Forex Brokers – Disadvantages

• Clients have to pay a fixed commission for each and every transaction that they execute on the platform.
• Higher initial deposit to open an account and start trading currency pairs.
• It is difficult to calculate the breakdown and stop-loss levels in advance because of variable spreads.
• ECN broker platforms are not very user friendly. It takes time to get used to the platform.
• Some ECN forex brokers may be dishonest.